Sunday, 30 January 2011

Some Positive Developments in the Greek Tax System

There have been a number of highly positive developments in the Greek tax system lately which have unfortunately been overlooked or misunderstood by the press and other commentators. It’s worth taking a look at some of these, and also to try to understand what the underlying drivers of the situation are.

The fundamental problem with Greece’s corporate tax policy is not so much the level of taxes (more on this later), as it is three related issues:

a.Despite the tax burden paid by companies and individual workers, the quality of public services is low in critical areas such as public healthcare and education. Since the state retains a de facto monopoly in these areas, the average taxpayer understandably questions why s/he should pay taxes. Besides this monopoly, there is plentiful evidence that suggests that tax evasion occurs due to purely personal, selfish reasons. Whatever the case, this leads to a situation where, depending on which report you read, between 20-40% of the GDP remains in the “black” or “grey” sectors, and is therefore untaxed.

b.A major share of the responsibility for the poor quality of public services is, in turn, the fact that the public sector is grossly underfunded, primarily because Greece taxpayers do not pay their fair tax allocation. Greece’s per capita spending on healthcare or education, or share of spending as a proportion of GDP, are among the lowest in the European Union. In terms of average salaries, the wages paid by the public healthcare and education system in Greece are also far below what a living wage would be.

c.The lack of efficiency in resolving issues related to licensing or approvals from the public sector, which is often referred to as “red tape” or “bureaucracy.” While this is undoubtedly higher than we may wish, it is a fact that this is far lower than many other EU countries, and usually far cheaper to deal with. Nevertheless, it remains a major disincentive to business activity and investment in Greece.

The result is something of a vicious circle: successive governments invest in public education and healthcare (both in terms of capital investment as well as operating expenditure, e.g. salaries). But these investments are not financed through sustainable public spending, but by debt spending. In the meantime, the large majority of independent professionals and companies systematically under-report its true income, thus avoiding taxes. At the same time, they availing themselves of at least some public services, thus incurring public expenditure which cannot be met by public revenue.

For those readers interested in a brief comparison of tax rates, I consider that the problem is not so much corporate or individual income taxes, which are roughly in line with main European norms, but the social insurance taxes. At a combined rate of over 44% for employer and employee, the main social insurance tax under IKA is far too high compared to equivalent rates in Europe. It is a major barrier to legal employment, and a main reason why salaries are kept artificially low, why there is high unemployment, and why there is a large share of “grey” market unemployment.

Table 1: Main Direct & Indirect Taxes for a Limited Liability Company

Tax Type

United Kingdom

Greece

Cyprus

Corporate Income Tax

21%1

20%

10%

Payroll Taxes2

23%3

44%

16%

VAT4

20%

23%

15%

Notes

1.The rate of 21% applies to companies making profits of up to UKP 300,000. Profits from UKP 300,000 – 1,500,000 are taxed at 28%.

2.The payroll taxes listed include employer and employee taxes.

3.The UK rate is extremely complex to calculate: the UK rate listed here is based on a salary of EUR 32,000 per year.

4.For VAT, the question is not only the tax rate, but the speed of VAT refunds. In Cyprus, VAT is refunded quarterly. In Greece, it is refunded annually, and given the economic crisis there are major delays with refunds – over 18 months on average.

To Greece’s credit, a reform introduced by Minister of Labour Louka Katselli foresees a gradual reduction in the social security rate. This would, in my opinion, constitute a major incentive for employment and business development. It remains to be seen how exactly this will be applied, but it is sorely needed.

There are also a range of tax incentives which many readers may not be aware of. For instance, a business owner who declares only dividends from his or her personal work in a company (in other words, declares no salary) is exempt from the 25% dividend tax. This is a major incentive which is not found in UK, German or French income tax law.

It remains to be seen exactly how far future tax competitiveness will become in Greece. But I would like to reiterate my main point: the main issue involving taxes in Greece are:

a.The fact that many, if not most, independent professionals and companies in Greece do not pay their fair tax assessment. As a result, the government has been forced to raise indirect taxes (such as VAT and fuel taxes), which hurt all consumers.

b.The fact that in particular, social security taxes are a major disincentive to employment and to the provision of living wages by employers.

c.The fact that the quality of public services remain low, for reasons both to do with the absolute level of investment (due in no small part to low tax collection), as well as due to political patronage and other issues.

There are obvious solutions to these issues, and it is a major test of political will, strategic planning and operational implementation for the government. But it deserves the benefit of the doubt as it begins this process, and it would be of great national benefit to the country if most companies and individuals to take a real look at their own income and their own personal responsibility for the present situation, and take corrective measures.

Subscribe via email

Comments on the Blog

I will post any and all comments to this blog, providing they respond to a specific post in a relevant manner, do not contain profanity or ad hominem attacks, and otherwise contribute to civilised discourse. If you do post a comment, please include your email if you wish a response - Blogger does not provide email addresses otherwise.